It could be said that for every company that quits China amid heightened tensions with the US and a de-facto trade war between the two powers, there’s a company ready to nearshore in Latin America. This “nearshoring” or “friendshoring” trend has been gaining steam over the past few years and is set to take off in 2023. Nearshoring in Mexico is taking hold fast – no one in the Americas has benefitted more from this trend than the Mexican manufacturing and tech sectors.
A growing number of US companies sooner or later realized they couldn’t rely on China anymore. Disruptions in global supply chains brought on by the Covid-19 pandemic, frosty US-China relations, Russia’s invasion of Ukraine and rising inflation have led many companies to move their operations closer to home. Nearshoring, or expanding a presence to countries with proximity to a company’s customer base, seems a logical move for many. More often than not, Mexico became the country of choice.
Nearshoring in Mexico also got a financial shot in the arm in July 2022. That’s when the Inter-American Development Bank (IDB) pledged to invest between $1.75 billion USD to $2.25 billion USD to promote nearshoring initiatives in the country. For any large decision, such as where in Mexico to locate your nearshoring operation, you can get only so much information from Google searches and phone calls with associates south of the border. That’s why before any significant move is made, it’s essential to hire a legal representative in Mexico to provide businesses with on-the-ground expertise and straightforward answers.
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What are the benefits of nearshoring in Mexico?
- Lower cost of labor
- Shorter supply chain
- Existing free trade pact with the US, Canada
- A large pool of skilled workers
- Strong intellectual property regime
- Well-developed business infrastructure
Let’s take a more detailed look at the benefits of nearshoring in Mexico.
Nearshoring in Mexico: Top 6 advantages of setting up operations there
1. Lower labor costs
It’s the driving factor or any nearshoring/outsourcing calculus. In Mexico, manufacturing wages, for example, are, on average, about $4 USD an hour, compared with $30 USD an hour for American workers. This business logic is clear. Also, doing business in China is not as cost-effective as it used to be; wages in the Asian giant have doubled on average over the past few years.
2. Shorter supply chain
It’s no secret that global supply chains have been fraught with problems in recent years; some have called it a supply-chain crisis. US companies don’t have to worry about travel or border restrictions when nearshoring to Mexico. Lower transportation costs and a shorter geographical distance mean products reach markets much faster.
3. Free trade agreement with the US, Canada
Mexico is the US’s third-largest trading partner thanks to the United States-Mexico-Canada Agreement (USMCA), which evolved out of the old NAFTA trade pact. The trade agreement makes it easier for US companies to invest in the Mexican market and open operations there. It also allows for a freer flow of products and services across the borders of all three countries.
4. Large pool of skilled workers
Another benefit of nearshoring in Mexico is the country’s large pool of highly qualified and educated workers, particularly in manufacturing and tech. The universities turn out tens of thousands of engineering graduates each year. Their growth sectors have also graduated from basic assembly to more sophisticated industries such as R&D, product design, and medical device.
5. Strong intellectual property regime
As the US continues to be a world leader in innovation, intellectual property (IP) and copyright protections are crucial. The USMCA agreement, which came into effect in 2018, establishes a robust protection regime for IP, copyrights, patent protection, and a specific subset of protections for agricultural and pharmaceutical innovations.
6. Developed industrial infrastructure
The Mexican government has invested heavily in developing its infrastructure. Nearshoring in Mexico means businesses will have access to developed industrial areas, quality roads, and all essential building/structural utilities that an overseas company might need to begin operations.
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So, for nearshoring in Mexico, in terms of the benefits it offers to foreign companies, entrepreneurs and investors – and the economic growth it brings to the country – the trend has nowhere to go but up. But what are industry observers and analysts predicting for nearshoring in 2023?
Predictions for nearshoring in Mexico in 2023
According to the analysts at the industry group Tech Behemoths, here are just a few things they are predicting for nearshoring in Mexico this year as it relates to the IT/tech sector:
- Skyrocketing demand for nearshoring services – The need for nearshoring services in Mexico is expected to grow significantly in 2023, driven by companies looking to reduce costs while gaining access to skilled professionals.
- Increased technological specialization – In 2023, Mexico is expected to become more specialized in software development. More Mexican software developers will be qualified to perform various specialized, niche services. The companies they work for will see more excellent business, as few rivals can match their highly-competitive position in the market.
- Improved nearshoring practices – In 2023, Mexico will likely improve its nearshoring practices, offering more transparent and cost-effective solutions for foreign businesses. The government has already made moves toward the development of a Code of Ethics for the industry centered around the protection of IP rights across borders.
Biz Latin Hub can help you
At Biz Latin Hub, we provide integrated market entry and back-office services throughout Latin America and the Caribbean, with offices in Bogota and Cartagena, as well as over a dozen other major cities in the region. We also have trusted partners in many other markets.
Our unrivalled reach means we are ideally placed to support multi-jurisdiction market entries and cross border operations.
As well as knowledge about nearshoring in Mexico, our portfolio of services includes hiring & PEO accounting & taxation, company formation, bank account opening, and corporate legal services.
Contact us today to find out more about how we can assist you in finding top talent, or otherwise do business in Latin America and the Caribbean.
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